Yes, the Higher Education Bubble Will Pop this Decade and Here's One Reason Why

At Human Events Michael Barone has a fantastic column on a subject that Glenn Reynolds and others have been talking about for awhile now, the coming collapse of higher education:

We are still suffering from the bursting of the housing bubble created by low interest rates, lowered mortgage standards, and subsidies to Fannie Mae and Freddie Mac. Those policies encouraged the granting of mortgages to people who should never have gotten them -- and when they defaulted, the whole financial sector nearly collapsed.

Now some people see signs that another bubble is bursting. They call it the higher-education bubble.

For years, government has assumed it's a good thing to go to college. College graduates tend to earn more money than non-college graduates.

Politicians of both parties have called for giving everybody a chance to go to college, just as they called for giving everybody a chance to buy a home.

So government has been subsidizing higher education with low-interest college loans, Pell grants, and cheap tuitions at state colleges and universities.

The predictable result is that higher education costs have risen much faster than inflation, much faster than personal incomes, much faster than the economy over the past 40 years.

I have a special interest in this subject and you can expect blog posts from me on it regularly at PJ Tatler. From December 2007 through the end of July 2009 I worked full-time first as a student loan debt collector and then as an assistant manager helping oversee a team of such "default prevention specialists."

To begin to understand just how screwed up the situation is it's important to realize how federally-insured student loans are so different than other kinds of debt. As a "collector" I barely actually collected any money. Instead my job primarily entailed tracking down borrowers so they could put their loan back into forbearance or deferment so they would not default. Borrowers for loans dispersed between the early '90s and the passage of Obamacare have a wealth of perks for those who are unable or uninterested in making payments. Lose your job? No biggie, you're eligible for 2-3 years worth of unemployment deferment. Have a job that's not paying you much? Chances are you'll be eligible to use some of your 3 years' worth of economic hardship deferment. Have other bills that you'd rather pay instead of your student loan? No problem, Sallie Mae and many other lenders offer sometimes as much as FIVE YEARS worth of forbearance time. Well, what happens if you've burned through all the time and still want need time off from having to pay? Sallie Mae offered 3 years of Title IV administrative forbearance that had the same qualifications as the economic hardship deferment. Thus, as a collector I'd regularly come across borrowers who had gone YEARS without ever making a payment and the loan's capitalized interest had just grown and grown and grown -- much to the bank's delight.

And what happens if someone actually does default on their student loan? First of all they have to be delinquent for around a year before that happens. At 270 days of delinquency the loan is eligible for default but it usually doesn't actually happen until 330-370+ days of delinquency. (The banks are legally required to perform due diligence to try and prevent default. If adequate attempts have not been made to reach the borrower then it cannot be defaulted.) At default the guarantor (the federal government's collection of your taxpayer dollars) reimburses the bank almost everything owed and the borrower's loan is sold to a collection agency. At this point the debt will increase by another 20% or so in collection fees but the borrower will often have the opportunity to "rehabilitate" the loan to bring it back into good standing. Usually they do this by making a year or so of auto-debited or at least consecutive payments. Then the loan returns, though much larger. But what also comes back? ALL of their deferment and forbearance options are reset back to zero because it's basically a new loan. Then the whole cat-and-mouse process of putting off paying the loan, trying to hide from collectors and skiptracers, and letting the interest capitalize more and more can just start again.

It should be pretty obvious why a system like this is unsustainable and doesn't actually help anyone except the big banks and politicians in both parties.

UPDATE: I respond to one of the commenters below in a new Tatler post in which I explain why federally-insured student loans cannot be discharged in bankruptcy.